These days everyone wants a piece of Britain. Hedge fund managers and bonus-rich bankers have long sought status in owning hobby farms, but now that soft commodity prices – from wheat to meat – are soaring, big commercial farmers from Denmark and Ireland are getting in on the game too. The result? Farmland prices have risen 28% to a record £10,439 a hectare in the last 12 months, and are up well over 50% since 2004.
According to the Royal Institution of Chartered Surveyors we are not at the top yet. Given fast-rising food prices (most grains have hit record highs in the past few months) and the consequent heavy demand for farmland, 60% of surveyors say they see prices rising another 10% in 2008.
I’m not convinced on this one. Note that 37% of demand for land still comes from “lifestyle” buyers rather than real farmers, and there is every chance that this demand will fall off sharply as the global economy and the City deteriorate into 2008.
Prices had already started to, as agent Knight Frank put it, “soften” at the end of last year. Still, whether prices fall or rise 10% over the next 12 months is neither here nor there for most of us: with land at more than £10,000 a hectare, owning even an itsy small holding is well into dream territory.
Still, that doesn’t mean that we can’t take part in the boom times for agriculture (see: How to profit from rising soft commodities prices for why I expect this boom to continue). We may not be able to bag ourselves 1,000 acres of dairyland in Devon, but we can invest in one of the world’s greatest food producers – Brazil – with no trouble at all.
Two reasons to invest in Brazil
Why Brazil? Because it has two things much of the rest of the world is lacking – a plentiful supply of fertile land and a huge amount of fresh water, thanks largely to the Amazon basin. These factors have combined to make Brazil the world’s largest supplier of a huge range of soft commodities from sugar and coffee to beef and chicken (not, by the way, the kind of chicken Jamie Oliver would be recommending – it isn’t nicely raised but it is the kind of chicken most of the world eats).
Brazil’s abundance of water also means that it has no real energy problems of the kind the rest of the world is facing: 80% of its power is supplied by hydroelectric dams, with two large new projects under construction on the Amazon to cope with rising demand.
At the same time, Brazil, unlike the rest of us, has got to grips with biofuels. It has long been producing ethanol made from sugar cane (which is considerably more efficient than trying to make it from corn, as the Americans are) and it can now sell it for much the same price as petrol.
But Brazil isn’t just about farmland and food. It also has huge reserves of the hard commodities so much in demand from emerging Asia.
It is one of the world’s largest producers of iron ore and also has good deposits of uranium, nickel, gold and platinum. Better still, it appears to have a significant amount of oil. Oil giant Petrobras last year found what O Globo, the Brazilian newspaper, called a “gigantic” field of light crude oil and natural gas (possibly 5 billion to 8 billion barrels worth) in its Tupi field, just offshore from Sao Paulo, and recently announced the discovery of a huge natural gas field off the coast of Rio.
It will take a while for this oil to come on stream, given the problems producers are having sourcing drilling equipment, rigs and so on. But if the deposits are as big as they seem, Brazil could end up in the same oil-exporting league as the Gulf countries and Venezuela.
Brazil’s economy looks strong too
Also good news is that, at a time when the economies and the currencies of the US, the UK and the Eurozone look to be in pretty dismal shape, Brazil’s is not. It is running a trade surplus of about $40 billion (£20 billion) a year (and rising as commodity prices rise) and its gross domestic product (GDP) is currently growing at an annual rate of over 5% a year.
It has a large middle class made up of about 20m households and both personal and corporate debt levels are low (the ratio of mortgages to GDP in Brazil is 2%; in the UK it is more like 80%). Brazil also appears to have little exposure to the sub-prime crisis rattling the emerging world – so far.
Finally, it is politically stable: Jim Slater, a great fan of Brazil, described president Luiz Inacio Lula da Silva to me in a talk over breakfast a few weeks ago as being both “pragmatic” and “popular”.
Right now it’s hard to find places that make sense as home for your money. Look at the UK. In the past few days we’ve seen factory gate inflation up 1% to 5.7%, the biggest rise for 16 years, and the governor of the Bank of England has said that consumer price inflation (CPI) could break above 3% if interest rates fall as the markets expect.
We’ve seen some nasty results from Bradford & Bingley (BB), which now says it expects a “continual increase in mortgage arrears and a steep increase in repossession arrears”.
And, of course, house prices are still falling – January marked the sixth successive month in which more surveyors reported a fall than a rise in house prices. The numbers coming out of the US and Europe are no better.
As Tim Price, chief investment officer of Union Bancaire Privée puts it “this is not a good environment for equities full stop”.
Brazil is not perfect. It is not perfectly governed and its stock market will never be entirely immune from the shocks hitting the US. But at a time when many other regions are suffering, it has huge exposure to one of the few sectors that is still worth investing in – agriculture – and I think that makes it worth at least a small bet. How? The simplest way is to buy the iShares MSCI Brazil (IBZL) exchange traded fund. Jim Slater tells me he already has – to the tune of £2m.
First published in The Sunday Times 17/2/08